Sunday, October 21, 2007

Success Secrets: Munger's "Misjudgment" Part 5

This is Part 5 of an attempt to summarize the concepts of Charlie Munger’s insightful "Psychology of Human Misjudgment".

Earlier sections:

Part 1

Part 2

Part 3

Part 4

13 Munger Descriptor: Overoptimism Tendency
Alternate Descriptor: Optimism without rational foundation

Expect failure if plans are not made rationally. Use mathematical probability techniques. Let the mathematics determine whether a business splan is “rosy”. Use the most pessimistic projections.

14. Munger Descriptor: Deprival Superreaction Tendency
Alternate Descriptor: Unusual sensitivity to real or perceived loss

Something perceived as “taken away” (money, power, perks, status, a comfortable situation) is perceived as a much more painful event than if the same status had never occurred.

This is a subtle and powerful observation and, as Munger says, much “ideological” , religious, and bureaucratic conflict may be traceable to this brilliant concept.

15. Munger Descriptor: Social-Proof Tendency
Alternate Descriptor: Irrationally following the example of others

Expect people to use this unfortunate decision-making shortcut. Conformity can lead to financial problems (“keeping up with the Jones’s"), or even international tragedy (when totalitarian and genocidal regimes slowly use social proof to co-opt a society). Munger tells us that the ability to ignore the urge to follow others , when they are wrong, is a key success factor.


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